What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-04 compared with 2024-07-29 · 126 added, 125 removed, 325 unchanged (44% of the section changed)

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We have made statements in this Quarterly Report that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).

All statements other than statements of historical fact contained in this Quarterly Report, including, but not limited to, statements regarding our business strategy and plans, growth and growth strategies, developments in the markets for our products and services, financial results, development launches and effectiveness, research and development strategy, regulatory approvals, competitive strengths, objectives of management for future operations and current expectations or forecasts of future results, our expectations regarding the Boston facility and the Company’s plans to operationalize its Braintree facility, transition the manufacture of SurgiMend® and PriMatrix® to the Braintree facility, and to obtain pre-market approval of SurgiMend® PRS in implant-based breast reconstruction;

All statements other than statements of historical fact contained in this Quarterly Report, including, but not limited to, statements regarding our business strategy and plans, growth and growth strategies, developments in the markets for our products and services, financial results, development launches and effectiveness, research and development strategy, regulatory approvals, competitive strengths, objectives of management for future operations and current expectations or forecasts of future results, our expectations regarding the Boston facility and plans to operationalize the Company's Braintree facility, transition the manufacture of SurgiMend® and PriMatrix® to the Braintree facility, and to obtain pre-market approval of SurgiMend® PRS in implant-based breast reconstruction;

our expectations regarding CMP (as defined below) implementation and engagement;

restructuring and cost-saving initiatives, intellectual property rights, litigation and tax matters, governmental proceedings and investigations, mergers and acquisitions, divestitures, market acceptance of our products and services, accounting estimates, financing activities, ongoing contractual obligations, working capital adequacy, value of our investments, our effective tax rate, our expected returns to shareholders, and sales efforts, are forward-looking statements.

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the scope, duration and effect of additional U.S.

and international governmental, regulatory, fiscal, monetary and public health responses to public health crises;

fluctuations in foreign currency

exchange rates;

and international

governmental, regulatory, fiscal, monetary and public health responses to public health crises;

fluctuations in foreign currency exchange rates;

the amount of our bank borrowings outstanding and other factors influencing liquidity;

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For example, in 2021, we filed a pre-market approval (“PMA”) application for a specific indication for Surgimend® in the use of post-mastectomy breast reconstruction.

We cannot predict an approval date because of the timeline of restarting manufacturing at the Braintree facility, where Surgimend® will be manufactured.

In the late 2022, we acquired SIA, which is also pursuing a PMA for DuraSorb for use in implant-based breast reconstruction (“IBBR”).

We cannot predict an approval date because of the timeline of restarting manufacturing at the Braintree, Massachusetts facility (the "Braintree facility"), where Surgimend® will be manufactured.

We are also pursuing a PMA for DuraSorb for use in implant-based breast reconstruction (“IBBR”).

We completed enrollment for the DuraSorb U.S.

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We also continued to advance the development of pioneering neurosurgical technologies with the expansion of our product offerings.

In 2023, we launched the CUSA® Clarity tips for use in surgical procedures requiring the controlled fragmentation, emulsification and aspiration of bone as well as in laparoscopic liver surgery.

In 2023, we launched additional CUSA® Clarity tips for use in surgical procedures requiring the controlled fragmentation, emulsification and aspiration of bone as well as in laparoscopic liver surgery.

Growing Internationally:

Over the years, we have been significantly expanding our global footprint through investments in our commercial and manufacturing organizations, the expansion and development of international markets and new product introductions.

As part of our In-China-For-China strategy, we continue the build out of our assembly capabilities in our new

facility in Suzhou, China.

As part of our In-China-For-China strategy, we continue the build out of our assembly capabilities in our new facility in Suzhou, China.

Several new products were introduced in select international markets in 2023 and 2024, including MicroMatrix® and Certas Plus® Programmable Valve, which were launched in Europe, and CUSA Clarity laparoscopic tip, which was launched in Australia, New Zealand, Japan, Canada, South Africa and Israel.

In addition, DuraGen® Secure, received approval in Japan, while DuraGen Plus, an absorbable and sutureless collagen onlay indicated as a dura substitute for the repair of dura mater, was approved in China.

CereLink, DuraSeal® and MediHoney® also continued their market uptake in international markets.

We also continued to strengthen our presence in South Asia, Southeast Asia and South Korea with key leadership appointments.

Broadening Impact on Care Pathways.

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Driving Operations and Customer Excellence.

We have been making investments to build more responsive and scalable processes, enhance the reliability of our supply chain, and drive productivity initiatives to further supply and lower costs.

Additionally, we continue to invest in technologies, systems and processes to enhance the customer experience.

We continue to invest in our capacity expansion.

We have been making investments to build more responsive and scalable processes, enhance the reliability of our quality systems and supply chain, and drive productivity initiatives to further supply and lower costs.

We continue to invest in technologies, systems and processes to enhance the customer experience.

We also continue to invest in our capacity expansion.

This includes ongoing projects of transferring our Boston manufacturing to a new location in Braintree, Massachusetts, validating manufacturing processes in our manufacturing facility in Plainsboro, New Jersey and increasing capacity in our Memphis, Tennessee location.

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In seeking to sustain a culture of excellence and accountability, we have focused on employee empowerment and agility and building a diverse and inclusive workplace.

These efforts resulted in our being named in several best workplace lists globally in 2023.

Additionally, we have been making further strides in advancing our environmental, social and governance (“ESG”) agenda to drive sustainability across the organization and recently published our second annual ESG report in the third quarter of 2023.

These efforts resulted in our being named in several best workplace lists globally in 2023 and 2024.

Additionally, we have been making further strides in advancing our environmental, social and governance (“ESG”) agenda to drive sustainability across the organization and recently published our third annual ESG report in the third quarter of 2024.

For more information on our ESG strategy, goals, performance, and achievements, please visit “Our Company—ESG Report” at https://www.integralife.com/esg-report.

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We continue to invest in collecting clinical evidence to support our existing products and new product launches, and to ensure that we obtain market access for broader and more cost-effective solutions.

Electromechanical Technologies and Instrumentation.

Neurosurgical Solutions and Surgical Instruments.

The CSS business consists of a broad portfolio of market-leading brands, such as Codman®, DuraGen®, DuraSeal®, CUSA®, Mayfield®, Bactiseal®, and Certas® Plus, which are used for the management of multiple disease states, including brain tumors, traumatic brain injury, hydrocephalus and other neurological conditions.

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(“Arkis”) we added a platform technology, CerebroFlo® external ventricular drainage (“EVD”), a catheter with Endexo® technology, a permanent additive designed to reduce the potential for catheter obstruction due to thrombus formation.

The CerebroFlo EVD catheter has demonstrated an average of 99% less thrombus accumulation onto its surface, in

vitro, compared to a market leading EVD catheter.

The CerebroFlo EVD catheter has demonstrated an average of 99% less thrombus accumulation onto its surface, in vitro, compared to a market leading EVD catheter.

Our work to combine our Bactiseal® antimicrobial technology with the Endexo anti-occlusive technology continues to progress for both a silicone-based hydrocephalus and EVD project.

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Our collagen manufacturing capability, combined with our history of innovation, including our launch of NeuraGen 3D, provides us with strong platform technologies for multiple indications.

In the third quarter of 2021, we filed a PMA application for a specific indication for Surgimend® in the use of post-mastectomy breast reconstruction.

In the third quarter of 2021, we filed a PMA application for a specific indication for Surgimend® in the use of post-mastectomy breast reconstruction and in July 2024 received approvable pending GMP status from FDA, which approved and closed out the clinical portion of this PMA application.

In 2022, we acquired SIA, which has also submitted a PMA application for DuraSorb with IBBR, and in June 2023 we completed enrollment in the DuraSorb U.S.

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as of March 2024.

European Union Medical Device Regulation Updates

As part of our ongoing efforts to remain compliant, the Company continues to work towards European Union Medical Device Regulation (“EU MDR”) certifications.

In 2023, the Company received EU MDR certification in the CSS segment for Hakim Programmable Valves, Certas Plus without Bactiseal catheters, and DuraSeal Dural.

Additionally, the Company received EU MDR certification in the TT segment for IDRT and BioPatch in 2023, and MicroMatrix and Cytal in 2024.

In 2023, the Company received EU MDR certification in the CSS segment for Hakim Programmable Valves, Certas Plus without Bactiseal catheters, and DuraSeal Dural, as well as IDRT and BioPatch for the TT segment.

In 2024, the Company also received EU MDR certification for DuraGen Suturable for the CSS segment and MicroMatrix, as well as Cytal for the TT segment.

On March 7, 2019, TEI Biosciences, Inc.

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Until the issues cited by the FDA are resolved to the FDA’s satisfaction, the FDA may initiate additional regulatory action without further notice.

Any adverse regulatory

action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products and could have a material adverse effect on our business, financial condition and results of operations.

Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products and could have a material adverse effect on our business, financial condition and results of operations.

As required by the 2023 Warning Letter, we retained an outside expert consultant to perform an audit of the Boston facility in March 2024.

Since receiving the third-party audit findings for the Boston facility in March, the Company has reassessed its plans and timeline to resume the manufacture of PriMatrix® and SurgiMend®.

In parallel, the Company has been furthering its plans to complete the construction and operationalization of its new tissue manufacturing facility in Braintree, Massachusetts (the “Braintree facility”).

Based on these assessments, the Company no longer plans to restart the manufacture of PriMatrix® and SurgiMend® at its Boston facility and will, instead, restart manufacturing of these products at the Braintree facility.

In parallel, the Company has been furthering its plans to complete the construction and operationalization of its new tissue manufacturing facility in Braintree, Massachusetts.

The Company announced in the second quarter of 2024 that it no longer plans to restart the manufacture of PriMatrix® and SurgiMend® at its Boston facility and will, instead, restart manufacturing of these products at the Braintree facility.

The Company expects to operationalize the Braintree facility in the first half of 2026.

As a result of these decisions, during the three months ended June 30, 2024, the Company recorded a $4.6 million impairment charge, comprised of a $1.7 million impairment of an operating lease right-of-use asset and a $2.9 million write-off of fixed assets, which was recorded as a component of cost of goods sold in the condensed consolidated statements of operations.

As a result of these decisions, in the second quarter of 2024, the Company recorded a $4.6 million impairment charge, comprised of a $1.7 million impairment of an operating lease right-of-use asset and a $2.9 million write-off of fixed assets, which was recorded as a component of cost of goods sold in the condensed consolidated statements of operations.

For further detail on the impairment, see Note 10.

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Goodwill and Other Intangible Assets .

We continue to work with our customers in wound reconstruction and care as we move toward commercialization.

Revenues of products manufactured in the Boston facility for the year ended December 31, 2022 were approximately 5.3% of consolidated revenues.

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These efforts are expected to continue and while we expect a positive impact from ongoing restructuring, integration, and manufacturing transfer and expansion activities, such results remain uncertain.

In Q2 2024, we initiated the planning of a Compliance Master Plan (the “CMP”), a systematic and holistic approach to improving our quality system and Good Manufacturing Practice (“GMP”) compliance for the Boston/Braintree sites.

While the initial planning has been implemented for the Boston/Braintree sites, the CMP will be expanded across our manufacturing and supply network in the coming months to ensure we can sustain compliance and enable our product supply to match our customer demand.

We expect the CMP implementation and engagement to last through 2025.

As a result of both audits by regulatory agencies as well as our own reviews of the company’s quality management system, we are in the process of implementing a Compliance Master Plan (the “CMP”), a systematic and holistic approach to improving our quality management system across our manufacturing and supply network.

The primary objectives of the CMP are to remediate quality system gaps, harmonize the quality management system across the company, and enhance the quality culture at the company.

RESULTS OF OPERATIONS

Executive Summary

Net loss for the three and six months ended June 30, 2024 was $(12.4) million and $(15.7) million, or $(0.16) and $(0.20) per diluted share, as compared to net income of $4.2 million and $28.4 million or $0.05 and $0.35 per diluted share for the three and six months ended June 30, 2023.

The decrease in net income for the three and six months ended June 30, 2024, was driven by costs related to the Acclarent acquisition, as well as higher manufacturing costs.

Net loss for the three and nine months ended September 30, 2024 was $(10.7) million and $(26.4) million, or $(0.14) and $(0.34) per diluted share, as compared to net income of $19.5 million and $47.9 million or $0.24 and $0.59 per diluted share for the three and nine months ended September 30, 2023.

The decrease in net income for the three and nine months ended September 30, 2024, was driven by impacts from quality and operational issues, along with costs related to the Acclarent acquisition.

Special Charges

Income before taxes includes the following special charges :

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

Dollars in thousands 2024 2023 2024 2023

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Total $ 34,060 $ 30,851 $ 115,258 $ 100,937

(1) This primarily includes idle capacity charges, inventory write offs, site transfer costs, right of use and fixed asset impairments.

(1) This primarily includes idle capacity charges, inventory write offs, site transfer costs, quality remediation costs, right of use and fixed asset impairments.

The items reported above are reflected in the condensed consolidated statements of operations as follows:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

Dollars in thousands 2024 2023 2024 2023

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Total $ 34,060 $ 30,851 $ 115,258 $ 100,937

We typically define special charges as items for which the amounts and/or timing of such expenses may vary significantly from period to period, depending upon our acquisition, divestiture, integration and restructuring activities, and for which the amounts are non-cash in nature, and for which the amounts are not expected to recur at the same magnitude.

We typically define special charges as items for which the amounts and/or timing of such expenses may vary significantly from period to period, depending upon our acquisition, divestiture, integration and restructuring activities, and for which the amounts are non-cash in nature and are not expected to recur at the same magnitude.

We believe that given our ongoing strategy of seeking acquisitions, our continuing focus on rationalizing our existing manufacturing and distribution infrastructure and our continuing review of various product lines in relation to our current business strategy, some of the special charges discussed above could recur with similar materiality in the future.

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The Company’s revenues and gross margin on product revenues were as follows:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

Dollars in thousands 2024 2023 2024 2023

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Gross margin as a percentage of total revenues 52.6 % 57.1 % 54.2 % 57.5 %

Three Months Ended June 30, 2024 as Compared to Three Months Ended June 30, 2023

For the three months ended June 30, 2024, total revenues increased by $36.9 million to $418.2 million from $381.3 million for the same period in 2023.

Excluding the impacts of the Acclarent acquisition, the Boston recall and foreign currency impact, revenues remained flat compared to the same period in the prior year.

In the CSS segment, revenues were $301.8 million which was an increase of $30.7 million, or 11.3% as compared to the prior-year period.

This is inclusive of $31.3 million related to the Acclarent acquisition and $2.9 million unfavorable foreign currency impact on revenue.

Excluding the impact of foreign exchange and the Acclarent acquisition, the Neurosurgery portfolio grew low-single digits primarily due to increased sales in Dural Access & Repair and MicroFrance®.

In the TT segment, revenues were $116.4 million which was an increase of $6.2 million, or 5.6% from the prior-year period.

Excluding the impact of the Boston recall, the TT segment showed a low single-digit decrease in sales as compared to the same period in the prior year.

This is primarily attributable to a decline in Integra Skin due to supply constraints, partially offset by growth in DuraSorb and Gentrix.

Gross margin was $225.9 million for the three months ended June 30, 2024, an increase of $18.9 million from $207.0 million for the same period in 2023.

Gross margin as a percentage of revenues was 54.0% for the three months ended June 30, 2024 and 54.3% for the same period in 2023.

For the three months ended June 30, 2024, gross margins were impacted by Boston impairment charges, Acclarent inventory step up, and higher manufacturing costs.

For the three months ended June 30, 2023, gross margins were impacted by expenses associated with the Boston recall.

Three Months Ended September 30, 2024 as Compared to Three Months Ended September 30, 2023

Revenues and Gross Margin

For the three months ended September 30, 2024, total revenues decreased by $1.6 million to $380.8 million from $382.4 million for the same period in 2023.

Excluding the impacts of the Acclarent acquisition, the Boston recall and foreign currency impact, revenues declined low double digits compared to the same period in the previous year, driven by impacts from quality and operational issues.

In the CSS segment, revenues were $270.8 million which was an increase of $2.6 million, or 1.0% as compared to the prior-year period, inclusive of $31.0 million related to the Acclarent acquisition.

Excluding the impact of the Acclarent acquisition, the Neurosurgery portfolio declined low double digits, primarily driven by lower sales due to temporary shipping holds in CSF Management and Dural Access & Repair.

In the TT segment, revenues were $110.1 million which was an decrease of $4.2 million, or 3.6% from the prior-year period.

Excluding the impact of the Boston recall, the TT segment decreased high single-digits as compared to the same period in the prior year.

This is primarily attributable to a decline in Integra Skin due to production challenges, partially offset by growth in our private label business, MicroMatrix® & Cytal, and Durasorb.

Gross margin was $200.2 million for the three months ended September 30, 2024, a decrease of $18.1 million from $218.3 million for the same period in 2023.

Gross margin as a percentage of revenues was 52.6% for the three months ended September 30, 2024 and 57.1% for the same period in 2023.

For the three months ended September 30, 2024, gross margins were impacted by expenses associated with quality and operational issues.

For the three months ended September 30, 2023, gross margins were impacted by expenses associated with the Boston recall.

Operating Ex penses

The following is a summary of operating expenses as a percent of total revenues:

Three Months Ended June 30,

Three Months Ended September 30,

Research and development 7.2 % 7.0 %

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Total operating expenses 54.7 % 50.1 %

Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, increased by $34.4 million, or 17.7%, to $228.9 million in the three months ended June 30, 2024, compared to $194.5 million in the same period in 2023.

Total operating expenses, which consist of research and development, selling, general and administrative, and amortization expenses, increased by $16.6 million, or 8.7%, to $208.4 million in the three months ended September 30, 2024, compared to $191.8 million in the same period in 2023.

Research and Development

Research and development expenses for the three months ended June 30, 2024 increased by $3.2 million as compared to the same period in the prior year primarily due to the Acclarent acquisition.

Research and development expenses for the three months ended September 30, 2024 increased by $0.8 million as compared to the same period in the prior year.

Selling, General and Administrative

Selling, general and administrative costs for the three months ended June 30, 2024 increased by $30.6 million as compared to the same period in the prior year due to the professional fees and costs associated with the Acclarent acquisition and higher spending in commercial selling activities for both legacy and Acclarent products.

Selling, general and administrative costs for the three months ended September 30, 2024 increased by $15.2 million as compared to the same period in the prior year due to higher spending in commercial selling activities for both legacy and Acclarent products.

Intangible Asset Amortization

Amortization expense (excluding amounts reported in cost of product revenues for technology-based intangible assets) for the three months ended June 30, 2024 was $3.7 million compared to $3.0 million for the same period in the prior year.

Amortization expense (excluding amounts reported in cost of product revenues for technology-based intangible assets) for the three months ended September 30, 2024 was $3.8 million compared to $3.2 million for the same period in the prior year.

Non-Operating Income and Expenses

The following is a summary of non-operating income and expenses:

Three Months Ended June 30,

Three Months Ended September 30,

Dollars in thousands 2024 2023

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Interest expense (19,373) (13,062)

Other income (expense), net 1,437 (155)

Other income, net 2,112 471

Total non-operating income and expense $ (12,212) $ (7,984)

Interest Income

Interest income for the three months ended June 30, 2024 increased by $1.1 million as compared to the same period in the prior year primarily due to higher interest rates.

Interest income for the three months ended September 30, 2024 increased by $0.4 million as compared to the same period in the prior year .

Interest Expense

Interest expense for the three months ended June 30, 2024 increased by $6.2 million as compared to the same period in the prior year primarily due to incremental borrowing to fund Acclarent acquisition and higher interest rates.

Other Income (expense), net

Other income (expense), net for the three months ended June 30, 2024 increased by $1.6 million compared to the same period in the prior year, primarily driven by favorable foreign exchange impact.

Three Months Ended June 30,

Interest expense for the three months ended September 30, 2024 increased by $6.3 million as compared to the same period in the prior year primarily due to incremental borrowing to fund the Acclarent acquisition.

Other Income, net

Other income, net for the three months ended September 30, 2024 increased by $1.6 million compared to the same period in the prior year, primarily driven by favorable foreign exchange impact.

Three Months Ended September 30,

Dollars in thousands 2024 2023

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Effective tax rate 47.5 % (4.8) %

Our effective income tax rates for the three months ended June 30, 2024 and 2023 were 18.3% and (9.4)%, respectively.

For the three months ended June 30, 2024, the higher tax rate is primarily driven by lower book income, as compared to the previous year.

For the three months ended June 30, 2023, the lower rate was partially driven by a $1.1 million benefit associated with the Federal R&D credit.

The Company’s effective income tax rates for the three months ended September 30, 2024 and 2023 were 47.5% and (4.8)%, respectively.

For the three months ended September 30, 2024, the higher tax rate is primarily due to the limitation of foreign tax credits in the U.S.

and the limitation of federal tax credits in Switzerland, caused by lower three month book income, as compared to the previous year.

For the three months ended September 30, 2023,the primary drivers of the lower tax rate relate to a reduction to book income in higher-taxed jurisdictions and a $3.3 million benefit related to the filing of prior year tax returns.

The effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of taxable earnings and losses, tax planning and settlements with various taxing authorities.

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Several of the jurisdictions in which we operate have already adopted some form of the model rules, which could impact the amount of taxes that the Company pays during 2024 and future taxable periods.

The rules are complex and provide for delays of implementing the tax during the early transition years, if certain conditions are met.

At this time, the Company is projecting an immaterial amount related to Pillar 2 tax liability for the 2024 year.

The rules are complex and provide for delays for implementing the tax during the early transition years, if certain conditions are met.

At this time, the Company is projecting an immaterial expense related to Pillar 2 tax liability for the 2024 year.

The Company will continue to analyze the new Pillar 2 laws and any related guidance to determine potential impacts.

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The Company’s tax reserves are presented in the balance sheet within other liabilities, except for amounts relating to items that we expect to pay in the coming year, which would be classified as current income taxes payable.

Six Months Ended June 30, 2024 as Compared to Six Months Ended June 30, 2023

Nine Months Ended September 30, 2024 as Compared to Nine Months Ended September 30, 2023

Revenues and Gross Margin

For the six months ended June 30, 2024, total revenues increased by $24.9 million to $787.0 million from $762.1 million for the same period in 2023.

Excluding the impacts of the Acclarent acquisition, the Boston recall and foreign currency impact, revenues remained flat compared to the same period in the prior year.

For the nine months ended September 30, 2024, total revenues increased by $23.3 million to $1,167.9 million from $1,144.5 million for the same period in 2023.

Excluding the impacts of the Acclarent acquisition, the Boston recall and foreign currency impact, revenues declined low single digits compared to the same period in the prior year, primarily driven by impacts from quality and operational issues.

In the CSS segment, revenues were $829.0 million, an increase of $41.6 million, or 5.3% from the prior period, inclusive of $62.3 million related to the Acclarent acquisition, and $5.2 million unfavorable foreign currency impact on revenue.

Excluding these impacts, the Neurosurgery portfolio grew low single digits primarily due to increased sales in Dural Access and Neuro Monitoring.

Excluding these impacts, the Neurosurgery portfolio revenues declined low single digits, primarily driven by lower sales due to temporary shipping holds in CSF Management and Dural Access & Repair.

In the TT segment, revenues were $338.9 million, a decrease of $18.3 million, or 5.1% from the prior-year period.

Excluding the impact of the Boston recall, the TT segment decreased low single digits as compared to the same period in the prior year.

This is primarily attributable to a decline in Integra Skin due to supply constraints, partially offset by growth in DuraSorb and Gentrix.

Gross margin was $432.8 million for the six months ended June 30, 2024, a decrease of $7.1 million from $439.9 million for the same period in 2023.

Gross margin as a percentage of total revenue decreased to 55.0% for the six months ended June 30, 2024 from 57.7% in the same period in 2023.

For the six months ended June 30, 2024, gross margins were impacted by Boston impairment charges, Acclarent inventory step up, and higher manufacturing costs.

For the six months ended June 30, 2023 gross margins were impacted by expenses associated with the Boston recall.

Excluding the impact of the Boston recall, the TT segment decreased mid single digits as compared to the same period in the prior year.

This is primarily attributable to a decline in Integra Skin due to production challenges, partially offset by growth in our private label business, MicroMatrix® & Cytal, and Durasorb.

Gross margin was $633.0 million for the nine months ended September 30, 2024, a decrease of $25.3 million from $658.2 million for the same period in 2023.

Gross margin as a percentage of total revenue decreased to 54.2% for the nine months ended September 30, 2024 from 57.5% in the same period in 2023.

For the nine months ended September 30, 2024, gross margins were impacted by impairment charges associated with the Boston recall, Acclarent inventory step up, and expenses associated with quality and operational issues.

For the nine months ended September 30, 2023 gross margins were impacted by expenses associated with the Boston recall.

Operating Expenses

The following is a summary of operating expenses as a percent of total revenues:

Six Months Ended June 30,

Nine Months Ended September 30,

Research and development 7.2 % 7.0 %

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Total operating expenses 54.8 % 50.9 %

Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, and amortization expenses, increased by $40.8 million, or 10.4% to $431.8 million in the six months ended June 30, 2024, compared to $391.0 million in the same period in 2023.

Total operating expenses, which consist of selling, general and administrative expenses, research and development expenses, and amortization expenses, increased by $57.4 million, or 9.8% to $640.2 million in the nine months ended September 30, 2024, compared to $582.8 million in the same period in 2023.

Research and Development

Research and development expenses for the six months ended June 30, 2024 increased by $3.4 million as compared to the same period in the prior year primarily due to the Acclarent acquisition.

Research and development expenses for the nine months ended September 30, 2024 increased by $4.3 million as compared to the same period in the prior year primarily due to the Acclarent acquisition.

Selling, General and Administrative

Selling, general and administrative costs increased by $29.7 million as compared to the same period in the prior year driven primarily due to the professional fees and costs associated with the Acclarent acquisition and higher spending in commercial selling activities for both legacy and Acclarent products.

Selling, general and administrative costs increased by $45.0 million as compared to the same period in the prior year driven primarily by Acclarent acquisition costs and related commercial activities, as well as higher spending in commercial selling activities for legacy products.

Intangible Asset Amortization

Amortization expense (excluding amounts reported in cost of product revenues for technology-based intangible assets) for the six months ended June 30, 2024 was $13.8 million compared to $6.1 million for the same period in the prior year.

Amortization expense (excluding amounts reported in cost of product revenues for technology-based intangible assets) for the nine months ended September 30, 2024 was $17.6 million compared to $9.3 million for the same period in the prior year.

The increase is driven by the impairment of customer relationship intangible related to our Boston facility of $7.1 million.

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The following is a summary of non-operating income and expenses:

Six Months Ended June 30,

Nine Months Ended September 30,

Dollars in thousands 2024 2023

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Interest Income

Interest income for the six months ended June 30, 2024 increased by $2.1 million as compared to the same period in the prior year due to higher interest rates.

Interest income for the nine months ended September 30, 2024 increased by $2.5 million as compared to the same period in the prior year due to higher interest rates.

Interest Expense

Interes t expense for the six months ended June 30, 2024 increased by $7.7 million as compared to the same period in the prior year due to incremental borrowing and higher interest rates.

Interes t expense for the nine months ended September 30, 2024 increased by $14.0 million as compared to the same period in the prior year mainly due to incremental borrowing for the Acclarent acquisition.

Other Income, net

Other income, net for the six months ended June 30, 2024, decreased by $0.4 million as compared to the same period in the prior year.

Six Months Ended June 30,

Other income, net for the nine months ended September 30, 2024, increased by $1.2 million as compared to the same period in the prior year, primarily driven by favorable foreign exchange impact.

Nine Months Ended September 30,

Dollars in thousands 2024 2023

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Effective tax rate 35.3 % 8.2 %

The Company’s effective income tax rates for the six months ended June 30, 2024 and 2023 were 23.2% and 15.5%, respectively.

For the six months ended June 30, 2024, the higher tax rate is primarily driven by lower book income and a $1.7 million shortfall from stock-based compensation, as compared to the prior year.

The lower rate from the six months ended June 30, 2023 was primarily due to a $1.1 million benefit associated with the Federal research and development tax credit, offset by a $0.3 million shortfall from stock-based compensation.

The Company’s effective income tax rates for the nine months ended September 30, 2024 and 2023 were 35.3% and 8.2%, respectively.

For the nine months ended September 30, 2024, the higher tax rate is primarily due to the limitation of foreign tax credits in the U.S.

and the limitation of federal tax credits in Switzerland, caused by lower book income and a $1.9 million shortfall from stock-based compensation, as compared to the prior year.

For the nine months ended September 30, 2023, the primary drivers of the lower tax rate relate to a reduction to book income in higher-taxed jurisdictions and a $3.8 million benefit related to the filing of prior year tax returns.

GEOGRAPHIC PRODUCT REVENUES AND OPERATIONS

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Total revenue by major geographic area consisted of the following:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

Dollars in thousands 2024 2023 2024 2023

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Local economic conditions, regulatory compliance or political considerations, the effectiveness of our sales representatives and distributors, local competition and changes in local medical practice all may combine to affect our sales into markets outside the U.S.

Domestic revenues increased by $33.4 million for the three months ended June 30, 2024 compared to the same period in the prior year.

European sales increased by $3.2 million for the three months ended June 30, 2024 compared to the same period in the prior year.

Sales to customers in Asia Pacific decreased by $1.8 million for the three months ended June 30, 2024.

Sales to customers in the the Rest of World for the three months ended June 30, 2024 increased by $2.0 million compared to the same period in the prior year .

The international revenues were impacted by $3.0 million of unfavorable foreign exchange impact.

The increase in domestic revenues is primarily the result of the Acclarent acquisition.

Domestic revenues increased by $18.7 million for the six months ended June 30, 2024 compared to the same period in the prior year.

European sales increased by $3.8 million for the six months ended June 30, 2024 compared to the same period in the prior year.

Sales to customers in Asia Pacific decreased by $2.7 million for the six months ended June 30, 2024.

Sales to customers in the Rest of World for the six months ended June 30, 2024 increased by $5.2 million compared to the same period in the prior year.

Domestic revenues increased by $20.4 million for the three months ended September 30, 2024 compared to the same period in the prior year.

European sales decreased by $7.2 million for the three months ended September 30, 2024 compared to the same period in the prior year.

Sales to customers in Asia Pacific decreased by $11.7 million for the three months ended September 30, 2024.

Sales to customers in the the Rest of World for the three months ended September 30, 2024 decreased by $3.1 million compared to the same period in the prior year .

The increase in domestic revenues for the three months ended September 30, 2024 is primarily the result of the Acclarent acquisition, offset by a decline in sales of Integra Skin, Dural Access & Repair, and CSF Management.

The decrease in international revenues for the three months ended September 30, 2024 was also the result of a decline in sales of Integra Skin, Dural Access & Repair, and CSF Management.

Domestic revenues increased by $39.0 million for the nine months ended September 30, 2024 compared to the same period in the prior year.

European sales decreased by $3.4 million for the nine months ended September 30, 2024 compared to the same period in the prior year.

Sales to customers in Asia Pacific decreased by $14.4 million for the nine months ended September 30, 2024.

Sales to customers in the Rest of World for the nine months ended September 30, 2024 increased by $2.1 million compared to the same period in the prior year.

The increase in domestic revenues for the nine months ended September 30, 2024 is primarily the result of the Acclarent acquisition, offset by a decline in sales of Integra Skin, Dural Access & Repair, and CSF Management.

The decrease in international revenues for the nine months ended September 30, 2024 was also the result of a decline in sales of Integra Skin, Dural Access & Repair, and CSF Management.

The international revenues were impacted by $5.2 million of unfavorable foreign exchange impact.

The increase in domestic revenues is primarily the result of the Acclarent acquisition, which is offset by decreases related to the Boston recall.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

The Company’s working capital as of June 30, 2024 and December 31, 2023 was $784.0 million and $751.1 million, respectively.

Working capital consists of total current assets less total current liabilities as presented in the consolidated balance sheets.

The Company’s working capital as of September 30, 2024 and December 31, 2023 was $187.0 million and $751.1 million, respectively.

The decrease in working capital as compared to the prior year is primarily driven by $572.4 million of convertible notes, which became current during the year.

Cash and Cash Equivalents

The Company had cash and cash equivalents totaling approximately $215.2 million and $276.4 million at June 30, 2024 and December 31, 2023 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

The Company had cash and cash equivalents totaling approximately $215.2 million and $276.4 million at September 30, 2024 and December 31, 2023 respectively, which are valued based on Level 1 measurements in the fair value hierarchy.

Level 1 inputs represent quoted prices in active markets for identical assets or liabilities.

At June 30, 2024, our non-U.S.

At September 30, 2024, our non-U.S.

subsidiaries held approximately $183.5 million of cash and cash equivalents that are available for use outside the U.S.

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Short Term Investments

The Company had short term investments, primarily consisting of time deposits, which are valued based on Level 1 measurements in the fair value hierarchy, totaling approximately $81.7 million at June 30, 2024 compared to $32.7 million at December 31, 2023.

Six Months Ended June 30,

The Company had short term investments, primarily consisting of time deposits, which are valued based on Level 1 measurements in the fair value hierarchy, totaling approximately $62.4 million at September 30, 2024 compared to $32.7 million at December 31, 2023.

Nine Months Ended September 30,

Dollars in thousands 2024 2023

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Cash Flows Provided by Operating Activities

Operating cash flows for the six months ended June 30, 2024 increased by $1.7 million compared to the same period in 2023.

Within operating cash flows, net income less non-cash adjustments decreased for the six months ended June 30, 2024 by approximately $33.5 million as compared to the same period in 2023 primarily driven by costs related to the Acclarent acquisition, as well as higher manufacturing costs.

The changes in assets and liabilities for the six months ended June 30, 2024, net of business acquisitions, decreased cash flows by $22.4 million, mainly attributable to increases in prepaid and other current assets, and inventory, and decreases in other non current liabilities.

The changes in assets and liabilities for the six months ended June 30, 2023, net of business acquisitions, decreased cash flows by $57.6 million, mainly attributable to increases in inventory and other current assets, and decreases in accounts payable, accrued expenses and other current liabilities.

Operating cash flows for the nine months ended September 30, 2024 decreased by $2.6 million compared to the same period in 2023.

Within operating cash flows, net income less non-cash adjustments decreased for the nine months ended September 30, 2024 by approximately $75.2 million as compared to the same period in 2023 primarily driven by costs related to the Acclarent acquisition, as well as costs associated with quality and operational issues.

The changes in assets and liabilities for the nine months ended September 30, 2024, net of business acquisitions, decreased cash flows by $19.0 million, mainly attributable to increases in prepaid and other current assets, and inventory, offset by decreases in accounts receivable.

The changes in assets and liabilities for the nine months ended September 30, 2023, net of business acquisitions, decreased cash flows by $91.7 million, mainly attributable to increases in inventory, other current assets, and decreases in accrued expenses and other current liabilities due to reduced payments processed during the year.

Cash Flows Used in Investing Activities

Uses of cash from investing activities for the six months ended June 30, 2024 were $282.0 million related to the Acclarent acquisition, $49.0 million related to short term investments, and $45.2 million paid for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

There were no sources of cash from investing activities during the six months ended June 30, 2024.

Uses of cash from investing activities during the six months ended June 30, 2023 related to $29.3 million paid for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

There were no sources of cash from investing activities during the six months ended June 30, 2023.

Uses of cash from investing activities for the nine months ended September 30, 2024 were $74.8 million paid for capital expenditures to support the investment in the new Braintree facility, as well as improvement initiatives at a number of our manufacturing facilities, and other technology investments, $282.0 million related to the Acclarent acquisition, and $49.0 million related to short term investments.

Sources of cash from investing activities for the nine months ended September 30, 2024 were $19.3 million for short term investments converted to cash.

Uses of cash from investing activities for the nine months ended September 30, 2023 related to $42.3 million paid for capital expenditures to support operations improvement initiatives at a number of our manufacturing facilities and other information technology investments.

Sources of cash from investing activities for the nine months ended September 30, 2023 were $5.4 million in proceeds from settlement of our net investment hedges.

Cash Flows Provided by or Used in Financing Activities

Uses of cash from financing activities in the six months ended June 30, 2024 related to the repayments of $105.6 million under our Senior Credit Facility and Securitization Facility, $50.0 million related to the repurchase of treasury stock of under the share repurchase agreements, and $11.9 million related to payment of SIA contingent consideration.

Uses of cash from financing activities in the nine months ended September 30, 2024 related to the repayments of $147.2 million under our Senior Credit Facility and Securitization Facility, $50.0 million related to the repurchase of treasury stock of under the share repurchase agreements, and $11.9 million related to payment of a contingent consideration.

In addition, the Company had $3.4 million in cash taxes paid for net equity settlements.

Sources of cash from financing activities for the six months ended June 30, 2024 were $429.3 million proceeds from borrowings of long-term indebtedness and $6.4 million proceeds from the exercise of stock options.

Uses of cash from financing activities in the six months ended June 30, 2023 related to the repurchase of treasury stock of $150.0 million under the share repurchase agreements, repayments of $29.1 million under our Senior Credit Facility and Securitization Facility.

In addition, we had $7.6 million attributable to debt issuance costs, as well as $5.3 million in cash taxes paid for net equity settlements.

Sources of cash from financing activities for the six months ended June 30, 2023 were $15.2 million borrowing under our Senior Credit Facility and Securitization Facility and $3.4 million proceeds from the exercise of stock options.

Sources of cash from financing activities for the nine months ended September 30, 2024 were $451.1 million proceeds from borrowings of long-term indebtedness and $6.4 million proceeds from the exercise of stock options.

Uses of cash from financing activities in the nine months ended September 30, 2023 related to the repurchase of treasury stock of $275.0 million under the share repurchase agreements, repayments of $85.9 million under our Senior Credit Facility and Securitization Facility.

In addition, there was $7.6 million attributable to debt issuance costs, as well as $5.5 million in cash taxes paid for net equity settlements.

Sources of cash from financing activities for the nine months ended September 30, 2023 were $146.9 million borrowing under our Senior Credit Facility and Securitization Facility and $4.1 million proceeds from the exercise of stock options.

Credit Agreement, Convertible Senior Notes, Securitization and Related Hedging Activities

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Derivative Instruments , to the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report) for discussion of our hedging activities.

The Senior Credit Facility is subject to various financial and negative covenants and, at June 30, 2024, the Company was in compliance with all such covenants.

Our Consolidated Total Leveraging Ratio was 3.8, with the covenant requirement at 4.5 at the end of June 30, 2024.

The Senior Credit Facility is subject to various financial and negative covenants and, at September 30, 2024, the Company was in compliance with all such covenants.

Our Consolidated Total Leverage Ratio was 3.99, with the covenant requirement at 4.5 at the end of September 30, 2024.

Based on our current forecast for the next twelve months we expect to remain in compliance with the financial and negative covenants.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements during the six months ended June 30, 2024 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our interests.

We do not have any off-balance sheet financing arrangements during the nine months ended September 30, 2024 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our interests.

Contractual Obligations and Commitments

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The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses.

The critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 did not materially change in the six months ended June 30, 2024.

The critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 did not materially change in the nine months ended September 30, 2024.

Recently Issued Accounting Standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis